In a world where, with every passing day, the digital economy takes on a more important role on a global scale (eg, as of May 2018, the top five most valuable companies in the world1 were all directly or indirectly related to the digital economy: Apple, Amazon, Alphabet, Microsoft and Facebook), the tax systems of countries throughout the world are currently struggling to determine if economic activities carried out in each country are taxable and how much value, if any, is being created in the jurisdiction. Both issues are core principles of current tax systems, determining if a jurisdiction has the right to tax an event, and how the taxable basis should be determined.
The inability of tax regulations, both at internal and multilateral levels, to properly address the challenges arising from the constant advances and changes within the digital economy have been thoroughly addressed by the Organisation for Economic Co-operation and Development (OECD) through its 2015 Final Report on Base Erosion and Profit Shifting (BEPS), Action 1 (Addressing the Tax Challenges of the Digital Economy) and its 2018 BEPS Interim Report on Tax Challenges Arising from Digitalisation.
Even though the OECD has accurately spotted the new challenges entailed by the digital economy, the organisation has not yet reached a consensus on specific solutions to them. Nonetheless, the OECD criterion is that any solution should be consensus-based and aimed at a global level, whereas interim measures taken by countries are not encouraged or discouraged.
In this regard, as this is a pressing matter and as a multilateral solution is not likely to be reached and implemented in the short term, certain countries have taken unilateral measures to directly address certain issues arising from the digital economy.
Unilateral measures to address digitalisation
Pursuant to the OECD2 criterion, unilateral measures to tax digital activities can be grouped into the following four categories:
Alternative applications of the permanent establishment (PE)
One of the main differences between the digital economy and almost every traditional business model refers to the means and assets used for the creation of value, relying heavily on intangible assets which, until the past few years, had little to no relevance for traditional businesses. As the creation of value in the digital economy is no longer directly associated with tangible assets and the physical location of employees, among other things, both the traditional PE approach (to determine the right of a country to levy income) and the OECD Transfer Pricing Guidelines (applicable to determine the attributable profits to a PE) have become insufficient to ensure that income is levied where value is created.
By virtue of the above, certain jurisdictions3 aim to update the traditional PE approach, in order for their regulations to be able to capture situations within the digital economy in...